To The Moon

Look beyond the temporary weakness

Amazon is the last FANG (Facebook, Amazon, Netflix, Google) company to report earnings.

Here are my insights:

• Dismal sales guidance for 4Q 2022
• Slowdown in cloud computing
• Valuation opportunity for investors

Dismal sales guidance for 4Q 2022

For 3Q2022, Amazon reported 15% growth in net sales to $127.1 billion, slightly below expectations of $127.64 billion. EPS rose to $0.28,exceeding expectations of $0.22.

With the COVID pandemic largely over, shoppers are heading back to physical stores. This is observed in Amazon’s latest earnings result. Net sales for physical stores surged 10% to $4.69 billion, above expectations of $4.68 billion. But net sales for online stores disappointed expectations of $54 billion, with only a 7.1% increase to $53.49 billion.

The most disappointing aspect of Amazon’s results is the tepid sales guidance for the next quarter. The company expect net sales of between $140 billion and $148 billion in 4Q 2022, below expectations of $ 155.52 billion. This projection is the slowest holiday-quarter growth in the firm’s history.

The weak guidance is an indication that the post-pandemic spending surge could tamper in the coming months. Worse still, it indicates that the current cost-of-living crisis has impacted the purchasing power of consumers, reinforcing fears of weak consumer spending in the critical holiday season at year-end.

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Slowdown in cloud computing

Another disappointing aspect of Amazon’s quarterly result is the de-acceleration of growth to the cloud computing business, Amazon Web Service (AWS). Previously, AWS has been growing 30 to 40% each quarter. For 3Q 2022, Amazon reported only 27% growth to $20.54 billion,below expectations of $21.01 billion.

However, such concerns are overblown. The slowdown in growth is largely due to the tougher weaker economic environment and stronger US Dollar. Such factors are typically temporary and could no longer be a headwind for AWS once inflation subside next year.

In fact, AWS is still expected to grow at 16% CAGR over the next decade, reaching $350 bullion or 25% of Amazon’s total revenue. AWS remains lucrativeand is expected to operate at 25 to 30% EBIT margins, with strong leadership positions.

Valuation opportunity for investors

Amazon is undergoing a temporary soft patch due to the tougher macroeconomic environment. However, these factors are largely outside its control and dependenton the broader economy. Amazon is still a well-run company, with leadership positionin its core business of online and cloud-computing.

This year, the shares price of Amazon has dropped 38%. The firm is trading at a cheap valuation of 0.4x PEG, with 49.5x FY2023 P/E and 122% earnings growth for FY 2023. In terms of historical valuation, it is also trading at the lower range, near its 1-year mean of 38.8x.

Hence, investors should look beyond the temporary weakness, and see the current situation as a valuation opportunityfor them to buy.